CUTTING RATES TO THE BONEWhy Interest Rate Cuts Don't Always Work

CommonConservative.com ^ | 5-16-03 | Tom Adkins

[supercat]

One of my complaints about Greenspan's strategy has been that if people are expecting a rate cut, they will hold off on transactions that would leave them stuck at the current rate. By contrast, if people perceive that rates are going up, they'll try to lock in today's rates.

Of course, the difference between long-term and short-term rates means such behavior is not always effective. If there's a perception that short-term rates will drop, that drop will likely factor into long-term rates. Likewise if there's a perception that they'll rise. I don't think this is fully factored in by the market, though, since mortgage rates have tended downward even though they only place short-term rates can really go is up.

BTW, two points about taxes:

• This country is somewhat like a shopping mall that's losing tenants (as businesses go overseas) and losing money. What is the best strategy for the owner of such a mall: (1) raise rents; (2) reduce rents; (3) chain the doors so businesses can't leave?
• Part of the Senate's tax-cut package is a reduction in a certain foreign-business-income tax from 38% to 5%. I don't know how much revenue this tax covers now, or how much it will cover if it's passed, but suppose that there is today $10B in such revenue brought into this country yearly (netting $3.8B in tax). According to the Democrats, this cut will cost $3.3B in yearly tax revenue). Suppose, though, that after the tax cut, the amount of money brought into the country increases from $10B to $100B (netting $5B in taxes). Democrats won't say the tax cut brought in an extra $1.2B revenue. Instead, they'll claim it's costing $33B in revenue--ten times as much as expected.

[Orangedog]

The Fed is playing with fire right now. They are, at least in part, responsible for the where the economy is. Greenspan wated to take the wind out of the sails of stock speculators who were running up share prices to obscene levels. So what did he do?...he raised interest rates. That was when started to lose respect for him, because if he really wanted to just get the day-traders to cool it, he could have raised margain requirements, thus weakening the traders' leverage.

The Fed is printing dollars like mad trying to stave off deflation. We have, IMHO, about 18 months before all this new cash works it's way through the economy. That will be when things get very interesting, to say the least.

[Capitalist Eric]

Agreed. I cashed out of Silicon Valley in '99, and as things started to get worse and worse (macroeconomically speaking), the now-ex-wife asked for everything that demanded cash out-flows... I happily gave her everything she asked for (she gave me a fat check to "ease" the pain). Now, my credit's essentially perfect, and I have zero debt...

Waiting for a little while, to see how things shake out... When the real-estate prices really tank out, that's when I'll make my move... Get as many pieces of property as I can leverage into, and then rent/lease as needs be...

All I have to do is wait.... ;)

[Hillary's Folly]

Maybe this will help" President Bush Proposes New Spending

[mo]

one major concern is that Dubya has yet to demonsrate that his team understands the necessity for deregulation as well as tax cuts....Reagan clearly did.

[maica]

The Fed is playing with fire right now. They are, at least in part, responsible for the where the economy is. Greenspan wated to take the wind out of the sails of stock speculators who were running up share prices to obscene levels. So what did he do?...he raised interest rates. That was when I started to lose respect for him, because if he really wanted to just get the day-traders to cool it, he could have raised margin requirements, thus weakening the traders' leverage.

====


Worth repeating! I saw it that way as well.

[Gritty]

That brings us back to the original issue of tax cuts, rate cuts and spending cuts... Cut all three, and the American economy might shed the shackles that keep us spinning our wheels without going anywhere.

The government has just been playing with the first two. They have completely ignored the third.

When they get serious about spending cuts - hundreds of billions of dollars of them - then this economy could start a meaningful recovery. Until then, it's balancing on a three legged stool having only two uneven legs.

[Grampa Dave]

Excellent essay/oped.

I would add one other critical time point in your time line.

When Jeffords came out of the Closet a year ago and joined the Tax and Spenders, Da$$hole, Hildebea$t, et al, their proposed spending increases and proposed increased taxes scared the hell out of investors on Main street and in Wall Street.

Go to any stock tracking service and look at a two year graph showing DIA, SPY, MDY and any other index. We were on the way to coming out of the 9/11 tragedy. Look at where the markets were and trending up until May 2002. Post Jeffords gave into the fear of higher taxes and more spending, and the markets came sliding down.

When Jeffords came out of the closet and joined the tax and spend dark siders, Wall Street investors and yours truly went back into the bond market.

We need 60 Republican Senators to clear the way in 2005 for more tax cuts, less spending on social welfare and the other positive things you mention.

In the mean time low interest rates, the new tax cuts and the elimination of the double taxation on dividends will be a big help.

[lewislynn]

This country is somewhat like a shopping mall that's losing tenants (as businesses go overseas) and losing money. What is the best strategy for the owner of such a mall: (1) raise rents; (2) reduce rents; (3) chain the doors so businesses can't leave?

Actually it's (4). Move the mall overseas.

It doesn't matter how low the rent is when no one in town has the means or the customers to pay the rent.

Sadly, "This country IS somewhat like a shopping mall". Everyone is shopping, no one is producing. That can only last so long, which is why the (fictitious) mall is on the verge of closing.

[thinden]

nice piece, tom.

thanx for posting it.

[supercat]

Actually it's (4). Move the mall overseas.

Well, I was trying to suggest that the mall was analagous to the U.S. government; tenants represent tax-paying businesses, and the rent of course represents taxes.

Your #4 would be rather interesting given that analogy--the government itself moving overseas?

[Capitalism2003]

"We need 60 Republican Senators to clear the way in 2005 for more tax cuts, less spending on social welfare and the other positive things you mention. In the mean time low interest rates, the new tax cuts and the elimination of the double taxation on dividends will be a big help."

DONATE NOW!

[Capitalism2003]

woops...try this link

Make it happen Freepers!!

[norraad]

So, what will happen when all that new paper cash runs downstream?

I understand from a simple metaphorical approach, but I suspect there are other factors this time.

[A. Pole]

Everyone is shopping, no one is producing.

Chinese are producing.

[Orangedog]

I saw it that way as well.

Glad I wasn't the only one. I believe that one day, students of history will look back on this time and wonder "just what the Hell were they thinking?!"

The 800 pound gorilla that the policy makers will not (or cannot) acknowledge is the amount of consumer debt still being carried. One more round of Fed-induced refinancing and that will just about eat up the remaining equity, even based on inflated house valuation. The ones who jumped into variable rate mortgages will be the first to fall when Greenspan has to try to put the inflation monster he is feeding back on a leash.

[Orangedog]

When the real-estate prices really tank out, that's when I'll make my move... Get as many pieces of property as I can leverage into, and then rent/lease as needs be...

All I have to do is wait.... ;)

Be ready to wait for a while. I have a very nagging feeling in my gut that says that the popping of the real estate bubble will likely manifest itself with a relatively quick 10-20% drop, and then, after some buying interest surfaces, well be treated to home values dropping sort of like a lot of peoples' 401k's...every month people see it dropping and eventually stop watching because it's too depressing. THAT is when you pick up the ex-wife's assets for pennies on the dollar!

[Iconoclast2]

Bush's appointees have continued the War on the West that is destroying the economy of the Pacific Northwest, maintaining bogus Endangered Species Act listings and all sorts of enviro-nonsense.